Economists against Euro-Agreement

After long wrangling, the euro finance ministers have agreed that instead of euro or corona bonds, a recovery fund should be envisaged, which would be used to jointly finance post-crisis reconstruction expenditure in Europe. As a result, a good hundred economists recommended to the government this week that it would be better not to approve the proposal to the heads of state and government at all. What Europe needs now is for the central bank to finance additional debt arising from the corona pandemic. Here is the original text of the call.

EU, a deal at year zero

“The deal reached by the Eurogroup on April 9th on the instruments to adopt to face the pandemics and its severe economic consequences is not sufficient, it adopts instruments which are not up to the challenge, and marks a worrying continuity with the political line which turned the Eurozone into the area with the lowest economic growth rate.

It does not acknowledge the exceptionality of the current situation, with no equivalent in the last century, nor the fact that this upsets the paradigms which guided economic policy in the last decades.

Finance ministers seem to believe that what is happening will be limited to a short horizon, after which we can go back to “normality” without problems. This is not the case, as Mario Draghi, former ECB president and a man with a sound international reputation, has pointed out.

The current exceptional state of events requires exceptional instruments, which should have at least two essential features:
They should be activated in the shortest possible time span; They should limit as far as possible further increases in public debts, which will grow anyway for the additional expenditure governments are undertaking to contain the damages from the epidemic.

The only option fulfilling both requisites is monetary financing from the European Central Bank of a relevant part of additional government expenditures. It is an option explicitly forbidden by the European Treaties. But treaties, in time of necessity, can be suspended in compliance with the international law, and this moreover has already happened.

Monetizing public expenditures that cannot be postponed is not an unusual procedure. It has just been formalized in the United Kingdom, while the most important Central Banks – the Federal Reserve and the Bank of Japan – are adopting it in practice. In Italy it is now suggested by economists with different views: it does not happen often that a policy proposal is shared by different schools of thought.

In the next council of Heads of States and Governments, which should ratify the agreement reached by the Eurogroup, Italy should reject it, and propose that the major part of public expenditure to face the economic crisis, which we expect will continue over the next year and double in size, be financed through an intervention from the ECB.

Should the other partners refuse, the least harmful road would be to follow what the Italian Prime Minister announced recently: in this emergency, “We will manage by ourselves”.”